Top 10 Legal Compliance Tips for Directors of Nonprofit Boards

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2020 was an incredibly challenging year for nonprofit boards distracted by complying with ever-changing state and federal regulations due to COVID-19 while still trying to stay true to their nonprofit’s mission.  As we all still struggle with the effects of the coronavirus, the beginning of a new year is a good time for nonprofit board members to ensure the organization remains in legal compliance. Here are some tips:

1. Keep the mission in mind.

Each director should know the nonprofit’s mission and be able to share it accurately with potential supporters and stakeholders as part of his or her fiduciary duty of obedience. The mission must align with the organization’s activities; if it does not, the board will need to decide on the modification of one or the other.

2. Review the bylaws.

As an organization grows and changes, its bylaws may become outdated in some areas. If the organization’s bylaws fail to reflect what is being done in practice, then the bylaws will need to be amended appropriately.

3. Review the budget.

Budgeting for any organization can be a difficult task, especially when painful tradeoffs are necessary. For many nonprofits, uncertainty about revenue can make crafting a budget especially hard. Still, the effort is crucial for establishing good habits. Budgets can always be adjusted, but by following strict procedures a nonprofit can avoid uninformed decisions and expensive mistakes.

4. Track PPP requirements.

Nonprofits that received a federal Paycheck Protection Program (PPP) loan can have the entire loan forgiven under certain conditions. Nonprofit boards need to ensure that all paperwork is completed and filed in a timely fashion and that responsibility for following up is appropriately assigned.

5. Review staffing.

Good nonprofit governance includes routine evaluations of key staff members, which should be performed at least annually. In addition, the board needs to review the organization’s employment policies and procedures to ensure they are effective and legally compliant.

6. Prepare for IRS filings.

Most nonprofits are required to file annual informational tax returns — Form 990 for the IRS, and Form 199 for the Franchise Tax Board. While preparing for these filings is a year-round activity, boards need to pay special attention to matters that could impact exempt status such as excessive lobbying activities or changes to IRS regulations (see our prior post on IRS Issues Final Rule on Nonprofit Donor Disclosure Requirements.)

7. Review conflict of interest disclosure policy.

A director’s duty of loyalty includes an ethical obligation to disclose their personal interest in transactions that are before the board for approval. Nonprofit boards can get ahead of problems in this area by adopting clear policies regarding what the organization defines as a conflict of interest and how they will be addressed. In many cases, the solution is simply that the interested director doesn’t vote on the transaction. But some transactions may call for more robust practices, especially if the financial value is high.

8. Conduct elections.

Most nonprofit bylaws call for annual elections of directors and officers for specified terms of office. However, organizations sometimes neglect to take care of this significant governance issue. It is important for nonprofit boards to recruit “outsiders” with skills and experiences that will benefit the organization, such as having a legal, accounting, or marketing background. Boards should ensure that any candidates for board positions are interested and qualified to exercise independent judgment and provide meaningful oversight.

9. Review fundraising activities for compliance.

Some jurisdictions place simple but important limits on fundraising activities. Compliance with these rules is much cheaper than a fine. Check to confirm that local laws do not require a license for running a fundraiser. Also verify that no items that will be sold raise legal questions. While a free meal at a local restaurant or a basket of snacks may not be a problem, alcohol or tobacco products may raise specific compliance requirements.

10. Review recordkeeping.

Without good records, nonprofit boards are less likely to be able to maintain consistency over time, and is also likely to make critical mistakes. Keeping good records requires diligence as new records are made, and also a process for auditing files to confirm they are accurate and up to date.

The Church Law Center of California advises religious and secular nonprofits on governance and risk management matters. To find out how we can assist your organization, call us today at (949) 892-1221or reach out to us through our contact page.

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